BUSINESSES POST-CRISIS: THE STRATEGIC APPROACHES … · cicrespi engineering

BUSINESSES POST-CRISIS: The strategic approaches of milanese firms 1

BUSINESSES POST-CRISIS: THE STRATEGIC APPROACHES OF MILANESE FIRMS

Compiled by Giuseppe Airoldi, Valeria Negri and Fabio Quarato

Executive summary The aims and scope of the research The research focuses on the past and future strategic moves of member-firms of Assolombarda (the industry association grouping Milanese enterprises), and has its origins in the wider research project entitled “Italian businesses post-crisis: strategies for development and change in the face of global competition”, launched in the spring of 2010 by Confindustria (Italy’s confederation of manufacturing and services companies). It is also the natural follow-up to the “Strategic Moves” project conducted by Assolombarda in 2007-2008, under the auspices of the Assolombarda-Bocconi monitoring center for the competitiveness of Italian firms. 60 member-firms of Assolombarda were selected for analysis from among those that have recently shown good performance, and which, by reason of the variety of the sectors in which they operate, their size and their ownership, are representative of the diverse world of Assolombarda’s membership. The firms made themselves available to take part in research conducted through questionnaires and focus groups, whilst other information was drawn from the firms’ own websites and from public databases. The Assolombarda member-firms surveyed, divided into their macro-sectors of activity

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ADLER* ALCANTARA° ALFAQUADRI ASCO POMPE ‐ Gruppo Finder Pompe* BTICINO° CEDASPE CESARE BONETTI D’ANDREA DISA* FANTINI COSMI H.T.S.* MAPEI MERSEN ITALIA*° SAES GETTERS*+ STF SALVATORE TRIFONE E FIGLI

B.C.S. CARLO GAVAZZI SPACE*° CICRESPI ENGINEERING COLGAR CONTINUUS‐ PROPERZI DANI INSTRUMENTS ELETTROTEC* ETIPACK GEICO SCHINDLER° TENOVA* VALENTE* VORTICE ELETTROSOCIALI VRV*

ARTEMIDE* CAIMI BREVETTI HERMAN MILLER LTD° LA ROSA* LUALDI SAGSA* SLIDE

AMPLIFON+ BOMISA BUCCELLATI HOLDING ITALIA DAVIDE CAMPARI ‐ MILANO+ L’ORÉAL ITALIA° LEU LOCATI* MA‐FRA* MAIMERI NUNCAS ITALIA* PERFETTI VAN MELLE PIERRE MANTOUX* POMELLATO PREMIUM 1922* SARA LEE HOUSEHOLD AND BODY CARE ITALY° SOCIETÀ ITALIANA PRODOTTI ALIMENTARI

BRACCO* DOMPÉ FARMACEUTICI GUNA INDENA ISAGRO*+ ITALFARMACO SANOFI‐AVENTIS° SINERGA* ZAMBON COMPANY

(*) firms which also took part in the 2008 research (°) subsidiaries of foreign multinationals (+) companies listed on the Italian Stock Exchange

EXECUTIVE SUMMARY


Performance for the period 2004-2009: the impact of the crisis Over the period 2004-2008, the 60 surveyed firms on average showed a considerable increase in turnover (up 41% for the five-year period), with a significant drop – albeit lower than that experienced by the bulk of Italian firms – of 11% in 2009. Similar considerations apply to returns, again quite high until 2008 (ROA of between 8-10%, ROS of between 7-9%, and ROE of between 9-15%) and remaining positive in 2009 (ROA of 5.4%, ROS of 5.3%, and ROE of 3.8%). Of great significance was the fact that from 2006 to 2009, the leverage ratio (total assets/equity) decreased considerably (from 5.5 to 3.9), largely due to “capitalization” drives. Overall, the sample firms demonstrated their ability to cope well with a sudden and profound crisis such as that which erupted in the fall of 2008. This emerged clearly during the focus groups: the majority of firm executives seem to have taken the dramatic falls in sales on board as a hiccup which gave new impetus to their efforts to ensure long-term competitiveness and boost growth. More specifically, many of the research participants stressed that even in this particularly adverse situation, the principle that “in times of crisis you need to invest” still held true. A comparison between the strategic moves employed in the past (of the decade just gone) and those planned for the future also reveals a substantial degree of continuity in the strategic moves and approaches followed. Competitive strategies Competitive strategy relates to the individual strategic business areas (SBAs) into which the overall strategy of firms is divided, and refers to the decisions made to gain a competitive advantage over other firms operating in the same market – that is, a competitive advantage which is both lasting and tenable. In the standard literature on the subject, four basic competitive strategies are identified, designated respectively as:

- cost-leadership strategy; - differentiation strategy; - cost-based focus strategy; and - niche strategy.

These four strategies logically stem from the combined effect of two business choices:

- the choice of which competitive lever to activate: cost (high-quality products made at low cost and sold at competitive prices), or differentiation (products with special features that are different to those of competitors and appreciated by customers, who are willing to pay a price differential); and

- the choice of the scope of the target market: the whole world and everyone, or almost everyone, market segments with a wide range of products or particular segments of the market (certain types of customers, certain geographical areas, certain applications, and so on).

EXECUTIVE SUMMARY


The competitive strategies of the Assolombarda member-firms surveyed

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From all of the information gathered, the following overall picture can be drawn:

- many of the 60 firms quite clearly come within one of the four quadrants, meaning that those at their helm have made clear, sound and internally consistent choices;

- in several cases, however, there is a sense of hybrid strategies at play, in respect of which, what was said above applies equally here. These cases may result from specific efforts to achieve balance and coherence, but it is more than likely that they stem from situations of uncertainty or strategic reorientation, from which it would be advisable for them to emerge as quickly as possible; and

- in some cases, firms are large and broken down into separate business divisions that are characterized by different competitive strategies.

How Milanese firms compare with their competitors The research indicates that Milanese firms feel they are in a strong position vis-à-vis their competitors, have a very sound footing in technical areas and are well-placed on the sales front. It also emerges that Milanese firms consider they definitely outperform their competitors with respect to: - products: in terms of their quality, technological content, range and variety; - image, reputation and brand; and - production flexibility and the quality of their human capital. In contrast, they see themselves as not performing as well as their competitors in terms of: - price and costs: that is, price, and cost advantages linked to size. As regards the steps required to be taken in order to acquire new expertise, Milanese firms feel that they need to act on several fronts simultaneously, namely: hiring people,

Cost-focus

Cost-leadership

Niche

Differeniation

EXECUTIVE SUMMARY


forming partnerships with other firms, entering into agreements with universities and research centers, and acquiring businesses that possess the desired know-how. These measures were seen as necessary to be taken both in Italy and abroad. Furthermore, much store was placed in the importance of “external-development” efforts, that is, those involving strategic alliances and takeovers. The scale/competitor dilemma The bulk of the 60 firms surveyed were small- to medium-sized, with 11 of them having a turnover of less than 10 million euro, and 27 having a turnover of between 10 and 100 million euro. Nevertheless, in a certain sense, they are big businesses; when asked to estimate the market share they control, the average percentages that emerged were 30% in Italy and 20% worldwide. These are very large (or rather, relatively very large) market shares in small or very small specialist niches. Their competitors, however, are often multi-business firms that overall can be twice as big, if not 5 or 10 times larger. Again as regards their competition, the top three competitors of each firm surveyed were based largely in areas with “advanced economies”, with many headquartered in Italy, the US and Germany, some in France, Switzerland, the UK and Japan, and very few in China, India or Korea. Positioning in the supply chain In terms of their positioning in the supply chain, the data collected on the 60 firms surveyed indicates that: - some firms play extensive roles (both vertically and horizontally) within their supply

chains, engaging in the design, manufacture, and marketing and distribution of complex products and fulfilling a clear role as technology integrators;

- other firms hold more limited positions within a certain supply chain; here, however, many of the 60 firms surveyed have markets in several sectors; and

- in not a few cases, a worrying phenomenon emerged of firms being “squeezed” through an increase in the bargaining power of actors both “upstream” and “downstream”, which is in part due to the opening up and expansion of markets.

A key issue that cropped up several times during the research relates to the trade-off between independence and integration. In many cases, it was all too clear that firms which offer complementary products would be better off banding together. By doing so, these firms would be able to: (a) perform in-house part of the technology integrator role currently fulfilled by their “main contractor” client; and, (b) achieve economies of scale, at least on the sales and marketing front. The evident advantages of integration conflict with an equally evident tendency of individual firms towards autonomy as well as a lack of external incentives for cooperation between businesses. With regards to the dynamics of relative power within supply chains, a reduction seems to be emerging in the power of those “upstream” (firms supplying raw materials), whilst “downstream”, firms engaged in distribution have gained power in some cases and lost it in others. In terms of factors impacting on the power held within the supply chain, the surveyed firms placed great faith in the strength of their expertise and, at the same time, pointed to control of distribution and customers as a highly-critical factor.

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Finally, with respect to the issue of fragmentation or concentration within the supply chain, the majority of respondents indicated that there is a trend in progress towards concentration. Ownership structures and strategic moves Over the course of the last decade, there were few changes in the ownership structure of the firms surveyed. Yet if attention is focused on all the relatively large firms with clear growth plans, and if the observation period is extended by a few years, a rather dynamic picture emerges, with four stock-market listings, four changes of ownership, the entry of a significant minority shareholder (a natural person), and the entry of a private equity fund as a majority shareholder. It is nevertheless evident that, apart from cases involving listing or the injection of private equity funds, the owners of the firms surveyed tended to hold on to a 100% ownership stake, steering clear of allowing any third-party minority interests. This position helps to explain why there are very few – if not no – cases of “mergers”. The only relatively common mode of combining different groups of shareholders is the formation of joint ventures, where 100% of the ownership of one’s own firm is retained, and external stakeholders exist only in a separate legal entity as represented by the joint venture. The history of the firms surveyed for this study revealed quite a few cases of joint ventures that were subsequently acquired 100% by the Italian firms. It is interesting to note, however, that of the 210 strategic moves adopted in total by the 60 firms during the period 2000-2010, 20% involved pursuing growth through external development, and hence through acquisitions, mergers or strategic alliances. With reference to the strategic moves planned for the near future (a good 111 were mapped out in total), less resort to external growth would seem to be on the cards, though it still accounts for a significant share, with the percentage of planned moves in the near future involving takeovers or alliances dropping to 13%. Strategic approaches The strategic approaches followed by the firms may be pieced together and analyzed from a number of complementary perspectives, as set out below: - the intensity or pace of growth; - the direction of growth (sticking with the same core business, internationalizing,

diversifying, insourcing or outsourcing, or changing one’s business model); - the manner of growth: growth “from within”, by developing one’s own technical and

commercial resources, or growth “through external development”, by pooling the resources and expertise of other firms through acquisitions, mergers or various forms of strategic alliance; and

- the associated dynamics of ownership structures: maintaining full ownership, or opening up the firm’s capital in various ways such as through exchanges of shares, joint ventures, injection of private equity funds, or listing on the stock exchange.

Focusing on the 51 Italian-owned firms (that is, excluding the 9 multinational firms surveyed), six strategic approach patterns emerged: - approach A: progressive growth through internal development, sticking with the

same core business, and no change in the ownership structure: 25

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cases - approach B: rapid growth through acquisitions, sticking with the same core

business, and no change in the ownership structure: 4 cases - approach C: rapid growth through acquisitions, sticking with the same core

business, and opening up the ownership structure: 5 cases - approach D: transformation of the business model (primarily through internal

development) with an unchanged ownership structure: 6 cases - approach E: related diversification with an unchanged ownership structure: 8

cases - approach F: related diversification with an opening up of the ownership

structure: 3 cases The strategic approaches of the 51 Italian-owned firms surveyed: the significant clusters

Thirty-four of the firms have opted to stick with their core business. Of these, 25 are pursuing a strategy of gradual improvement, all while retaining the same ownership structure. The other 9, however, although sticking with the same core business, have opted for rapid-growth strategies, pursued mainly through acquisitions. Four of these 9 firms have financed their growth through internal funding and debt, without opening up their capital, whilst the other 5 have taken (or have stated that they intend to take) steps to open up their capital by listing on the stock exchange or through the injection of private equity funds. Italian-owned Milanese firms appear to be little if at all diversified and continue to remain so: 34 out of 51 have stuck to the same core business, 11 have made some moves to diversify (though in all case this was related diversification), and 6 are implementing changes to their business models, which in some cases also involves some additional degree of diversification.

Ownership structure

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Ownership structure

unchanged

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A. Progress ive growth through interna l development:

25 cases

E. Related Diversification: 8 cases

D. Transformation of the business model: 6 cases

C. Rapid growth through acquisitions: 5 cases F. Related Diversification: 3 cases

B. Rapid growth through

acquisitions: 4 cases

EXECUTIVE SUMMARY


Retaining the same core business is not, however, synonymous with stagnation. As we have seen, 9 of the 34 firms in the first-mentioned group have employed rapid-growth strategies in their businesses, and whilst these strategies have not always borne the desired results, this group of 9 firms features some of Italy’s leading businesses. Starting from the position of having a solid core of expertise, they have pursued aggressive internationalization strategies through acquisitions. Often, the firms they have taken over are ones with whom they have had long-running technical and commercial partnerships. In some cases, the strength of their starting position and success has enabled this growth to be entirely self-financed (in the sense of not having to open up their capital to investors); in other cases, growth has been achieved through listing or private equity. All 11 cases of diversification fall into the category of related diversification – at times, strictly related. These are firms that have decided to pursue growth by exploiting technical and commercial synergies. In 8 cases, the firms have proceeded without any changes to their shareholding structure, whilst in three cases, there have been changes in the ownership structure, although these only consisted in the establishment of joint ventures, whereby new joint-venture companies were created, but the ownership structure of the individual partner firms has remained unchanged. In 5 of the 11 cases of diversification, there was very significant takeover activity. Growth is achievable For those at the helm of Milanese firms, it is clear that the objective of growth in size is not an alternative to that of raising quality and product-performance levels. Increasing quality and product-performance levels and decreasing cost levels are merely conditions of survival, not of growth and development. Growth is achievable. The findings of our research confirm this and demonstrate that: - rapid growth can be achieved: either by sticking with the same core business, by

diversifying and perhaps by transforming one’s business model; - rapid growth can be achieved: both by retaining the same ownership structure and

by opening it up in one of the various ways possible; - in order to grow rapidly, it is necessary to go down the road of acquisitions; - it is desirable for such acquisitions to be the outcome of previous aggregations in

the form of strategic alliances and joint ventures; and that - in other words, it is essential to be very active in simultaneously employing all the

various possible interfirm aggregation mechanisms.

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BUSINESSES POST-CRISIS: THE STRATEGIC APPROACHES … · cicrespi engineering